Crude Observations

Another Labour Day Classic

Ah Labour Day. That annual celebration of the righteousness of the downtrodden worker, the brave collectives and essential workers, putting it all on the line day after day in order to enrich the greedy capitalist fat cats who live for exploiting the masses.


Like me. I am happy to call myself a fat cat capitalist. Well at least I was until I bought into the hype and decided to buy into the latest mania – crypto currency promoted on Twitter. Oops! There goes retirement I guess. Now I’m more of a capitalist mangy feral cat. Seriously though, is anyone else waiting for the bottom to fall out of the crypto-grift as eagerly as me? Fake currency and digital artwork worth more than some companies that produce the prodigious amounts of energy required to power these electronic networks just seems like a bubble waiting for Fed taper to pop.


Markets usually do the big bail on these things just as people are getting back from summer vacation and sending their kids back to school, so maybe we can see that sometime soon. After all, when 6 or 7 stocks have a greater market cap than many G7 countries, some reversion to the mean may be in order. It’s been months since the markets have had a 5% correction. Not trying to be Dr. Doom here, but be prepared I guess.


And of course with my kids now back to school (not sure what grade, it’s all a blur), it is time for me to get back to work as well.


Which leads me to my Labour Day tradition, which is a high level view of the M&A market such as it is followed by, you guessed it, a mindless set of predictions on that most awesome spectacle of a sports league, the NFL.


That’s right folks – are you ready for some football? Because I sure am.


The NFL season kicks off this Thursday, featuring the Super Bowl Champion Tompa Bay Buccaneers against my most hated team, the Dallas Cowboys, live from Florida. At least they were the most hated until owner Jerry Jones came out emphatically in favour of vaccines. Now the Detroit Lions are my most hated team. Because they’re the Lions.


Amid the mayhem of elections, COVID, Afghanistan, Trump, Biden, Texas, DeSantis, judicial buck-passing, Insurrection, Boogaloos and Roger Baker’s 3D printer obsession, the most popular league in the world is coming back in a game featuring two of its most transcendent stars in quarterbacks Dak “my contract is the size of Texas” Prescott and octogenarian Tom “avocado” Brady. Not to mention the anticipation as to what players and the league are going to do with anthems, flags, kneeling and positions on vaccination.


I don’t know about you, but to me this is the very definition of “must watch” TV and the ratings will be through the roof, likely challenging Super Bowl, if not Canadian election French language debate viewership levels.


But before that, ho-hum. M&A. Look, it’s what I do, I have to talk about it.


Fortunately, the energy sector at this particular juncture is very much in focus. Not only is the price of oil at levels we could only have dreamed of last April, but the price of natural gas is at levels that are veritably insane by natty watchers (note to Alberta government budget watchers – the last time we were actually not in deficit and paid off our debt? Gas did that). Add to that escalating costs of, well, everything, supply chain blockages, natural disasters taking out entire swaths of industry, LNG prices so high that purchaser tenders are going unfulfilled, growing demand for all forms of fossil fuels and a societal desire for cheap, cheap, cheap energy and you would be forgiven for thinking that the energy sector is on the verge of something big.


And you would be right. It is percolating. The kettle is plugged in. That weird thing on the stove is whistling. The microwave is beeping. The water, she is steaming.


So given that context, the M&A world is, shall we say, getting interesting.


Last year at this time, we were a mere six months into COVID madness and it seemed like we could get somewhere if we could only get people back to work, into the economy and beat down whatever consecutive wave of the pandemic came our way. A few deals got done but then things slowed and we all had to lock ourselves in our homes again. And again.  And then I think again. But finally the miracles of science and vaccines started taking hold and, Delta wave notwithstanding, openings happened, the economy picked up steam (well everywhere except Canada apparently!) and we found ourselves in the midst of an energy recovery so potent that the Alberta government was able to simultaneously knock $10 billion off our deficit and started a 4th wave.


As the summer has passed, we have seen consistent draws from storage and remarkable production discipline from OPEC+++++ which is now actually adding production to keep the market from overheating. From a Canadian perspective, TransMountain continues to be built, this time by a government that has unlimited money (how about them apples?), the Line 3 replacement is about to be energized and differentials have begun to narrow.


We find ourselves shipping record volumes one week and bit less the next, but major industry participants are making so much free cash flow that at some point they will run out of dividends to pay, shares to buy back and debt to prepay. At that point, all bets are off. The only place to put that excess cash is back into the ground and there is so much of it, it will create a mini-boom.


So, where are we at now? Well, I’d be lying if I didn’t say that we continue to walk on the edge of the precipice, and we need to take the proverbial blindfold off, but for Canadian oil and gas, it’s hard not to think that the worst may be behind us and (lightning bolt just missed me) better days are in fact just around the corner. And the smart players are already acting on it.


I mean think of it, we have weathered pretty much every sling and arrow that can come our way, right? The only way things could get worse is if Joe Biden decided to cancel some pipelines and ask Saudi Arabia and OPEC to produce more oil or if Justin Trudeau started to campaign on shutting down the energy sector and jacking carbon taxes through the roof.


Allow me to be the first to say this – neither of those two things will happen. Wait they have? What did the market think? Not much it seems.


So back to Labour Day and the point of this blog. Why is this the time to look at the M&A landscape instead of, say New Year’s?


It’s mainly because here in Calgaryland, Labour Day is transition time. Weather wise, Labour Day can bring a snowfall, or a thunderstorm or a 29 degree sun splash. Sometimes there are even the traditional cash payoffs for unvaccinated morons. We are actually forecast to get all four, possibly in one day. The payola has already been implemented! Yikes!


What is also a given as we come out of the Labour Day weekend – even in COVID times – is that the proverbial back to school/back to work switch gets thrown and Calgary’s business community gets busy again in preparation for a hoped for “better than last year” drilling season, since like any true energy industry participant, we are nothing if not optimists.


It happens like clockwork. Kids back to school, the leaves turn (trust me – it’s Calgary), budgets for 2022 start getting set and the pace of M&A heats up, regardless of stage in the commodity cycle, the commodity price, pandemic status, mask mandate or length of Jason Kenney’s vacation. The only difference is whether the focus is upstream, midstream or downstream and which particular subsectors will be leading the charge. It happens with us at Stormont as well. After spending much of summer sitting in the office or at home in various states of casual attire doing Zoom and Teams calls, we find ourselves physically back in the office, at the same time. Time to get back at it. The sector clearly isn’t sitting still and neither should we.


As we discuss with clients in the energy services space, there are certain ideal times of year when deals get more attention in the market or start getting done. These times are just after Labour Day but before American Thanksgiving, just after Christmas and before March and then, for Western Canada, post spring break up. Sometimes you get a pandemic that makes a mess of things, but people adapt and carry on.


For a variety of reasons, these times of year work, driven mainly by the service sector activity cycle but also by the buyer demographic and energy company capital budget timing.


In the context of the current market, new drilling activity is going to be muted so the upstream sector, at least on the oil side, isn’t going to set the world on fire (which of course would be a bad thing and is a terrible fossil fuel metaphor). Certain regions like the Montney and Deep Basin will see major investments while others will be quieter (think heavy oil areas like around Lloydminster and central Alberta). Oilsands will continue to maintain production. The main spend will be capex to maintain production levels across the board and opex to turnaround and optimize the existing infrastructure base.


In the current market, I like to think of it as a great realignment and repositioning. As I’ve said previously, good companies will always attract quality buyers and that is true no matter what the economic environment. There is just too much capital and the industry is too important for the M&A market to go away. In many ways this is an ideal time for smart buyers to start doing deals as we are still early enough in the price cycle to allow well-financed and patient buyers to pick up businesses with a lot of runway ahead of them.


As to the opportunity, there has been on the one hand a fairly significant culling of the industry and on the other a buildup of capital, most importantly private equity, looking for a home. As the industry has contracted and margins compressed, the weaker players by necessity have fallen by the wayside and the survivors have retooled their business models and moved their businesses forward. Into this breach step buyers looking to consolidate industry segments, build asset bases, acquire customers and otherwise position themselves for the cycle.


A big theme in the current market is scarcity. Much like the automobile market has been turned on its head by chip shortages and the used car market is seeing double digit price inflation, so too does the equipment-dependent energy services space (among others) finding itself struggling to find replacement or expansion equipment. Auction values at Ritchie Bros are robust.


Infrastructure continues to be a dominant theme in Canada’s energy sector, as major midstream and downstream projects continue to move forward (LNG Canada, Coastal Gas Link and the Trans Mountain Expansion), processing picks up and the renewables boom in Alberta (yes, you read that right) continues to gather steam.


I’m not predicting anything close to a return to heady, frothy, 2016 crazy times (and if you know the industry, you will understand how low that bar is and how tongue in cheek the comment is meant to be), but a gradual re-inflation of the industry is certainly in order, led by gold standard, efficient Canadian operators.


On the upstream side, industry subsectors that have been the most beaten up during the downturn are often the ones to see the first levels of interest – mainly companies that provide front end services such as engineering, planning, infrastructure services like road and right of way clearing, smart rentals and most anything site service related such as safety, security and medical services. Look for a trucking deal or two to get done in short order. That is a great leading indicator.


On the midstream side, along with the mega projects currently underway, we expect an ongoing influx of dollars into pipeline and processing infrastructure whether it is new-build or maintenance, turnaround and integrity related. The thesis on investing and maintaining critical infrastructure will always hold even if the market is about to get whole lot more competitive.


As far as who the buyers are, we anticipate a mix between Canadian strategic buyers including mid-market players and opportunistic private equity funds looking to support these mid-market players and pursue their own particular investment theses. We also anticipate that as some US players take advantage of the turnaround to exit mature portfolio holdings and finally take cash off the table, a new crop of US based buyers will be wanting to kick the tires in Canada.


So, we are as always cautiously optimistic on the M&A front, both from a business cycle and seasonal perspective, the evidence being our own client base and actual market evidence as well as a general feeling that with these projects coming on stream, many owners and management teams will prefer to have their companies built and oriented towards growth long before any commodity travels down a tube.


One big risk that we are tracking is COVID related capital mobility.


As it currently stands, not a day goes by that one of us doesn’t get an email or call from a US-based private equity fund letting us know they are open for business and actively looking for deals in Canada. Which is great. But from a practical perspective, if we send them a deal, they will want to visit the company and the cross-border complications that are currently in place are killing investment enthusiasm.


Forced to choose between a company in Calgary and one in Denver, a Chicago based PE fund is going to pick the Denver based opportunity every time, because it’s easier.


It sounds trite, but the cumulative impact of that decision tree alone on transaction multiples, foreign direct investment and expansion of our industry will be significant if not addressed soon, our capital markets are just too intertwined. This is why I believe that unless travel restrictions start easing sooner rather than later (like, enough with the 2022 nonsense) the economy is headed into seriously uncertain waters. Vaccine passports and rapid testing, border agreements and free flow of business should be an airline and regulatory priority – whoever cracks this nut wins the day. And this isn’t just a Canadian issue, the US State Department needs to get on it as well and take Canada off their ridiculous watch list.


I may be overstating this and we have several deals in the market where the buyers are all saying the right things, but I have never met a buyer who didn’t want to do a site visit.


Governments – please pay attention to this. Even if you’re otherwise campaigning.


A massive percentage of all M&A is private equity driven and most of that capital is located outside of Canada. If you want it to come here, you have to unlock the door. Just saying.


Now, on to the NFL.


This 1097th NFL season is going to be epic, I feel it. (It’s that many seasons, right?). Lots of exciting young stars, emerging teams, superstar holdouts, sex scandals, vaccine drama and team altering injuries, trades and suspensions – an that was just last month!


The pre-season was, thankfully, irrelevant except for a rash of injuries and vaccine related hijinks.




This year, much like Calgary weather, the NFL is completely unpredictable.


The evil empire is broken. Tom Brady is 1000 years old and the defending Super Bowl champion quarterback. In a training camp shocker, his erstwhile replacement in New England, Cam “COVID” Newton, has been cast aside in favour of a TB12 Carbon Copy. The more things change…


Tampa Bay is the Super Bowl Champion. Kansas City is the Super Bowl favourite (or should be) and Green Bay managed to get Aaron Rodgers to come back and work regular season miracles for one more year. The Austin Bills are legitimate Super Bowl threats, an idea that was inconceivable while they were still in Buffalo. Wait. They’re still in Buffalo? Oops, sorry Steve.


Other teams of note – Cleveland, Tennessee, Los Angeles (the Ram version), New England… ugh, Dallas (double ugh). And don’t sleep on Baltimore and Lamar (he’ll always be Murray to me) Jackson.


Rebuilding – New Orleans (does Jameis have a hurricane miracle in him?), San Francisco (they were great, what happened?).


Last hurrah – Pittsburgh and Big Ben, the bionic man. The Raiders – just stop it.


So what do I see?


All predictions are of course subject to the vagaries of COVID testing and vaccines, but assuming symmetric health, the Super Bowl this year will be Green Bay vs Austin. And the Packers will win.


Unless of course a couple of teams catch lightning in a bottle. And we get an epic New England vs Tampa Bay grudge match. And Mack Jones wins the MVP. Could happen!


There, I called it. Without watching so much as a snap.


Have a lazy weekend. Come Tuesday go to work. Ya lazy bastard. Unless Kenney gives you $100 to stay home!

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